SEC chief keeps options open on private securities

The top U.S. securities regulator pledged a rigorous review of potentially outdated private securities trading rules, but stopped short of endorsing changes being advocated by Republican lawmakers.

At a congressional hearing on Tuesday, Securities and Exchange Commission Chairman Mary Schapiro was pressed to make regulatory changes to help small and medium-sized companies more easily raise capital without going public.

In January, Goldman Sachs decided to limit Facebook offerings to foreign investors after intense media coverage spooked the bank into fears it could be accused of violating rules on soliciting investors.

Also at issue was the use of a special purpose vehicle by Goldman to circumvent a 500-shareholders-of-record rule which requires a private company to begin public financial reporting. The rule counts all shareholders individually, but the vehicle used by Goldman aggregated shareholders into one.

We are absolutely committed to looking at whether this threshold makes any sense, Schapiro told the House Oversight Committee hearing, adding that the agency is conducting an economic analysis.

Republicans want the SEC to raise the 500-shareholder threshold, or else change the rule so that more sophisticated investors who understand the markets will not count toward the total.

These folks are very sophisticated, said Representative Patrick McHenry. For heaven's sake, if you look at these substantial institutional players, they've got better research and information than the SEC and the government, he said.

Critics of the current threshold say the cap is too low and forces companies to raise capital only with large sophisticated investors and harms the ability of smaller investors to get a piece of the action. They also fear it creates costly logistical challenges for companies as they seek to manage the shareholder total so they do not hit the 500 mark.

In addition they are also concerned that the rule adversely impacts how companies can compensate employees. Although option-holders are not counted under the rule, once the option is exercised, the employee counts toward the 500.

STRIKING A BALANCE

Schapiro sought to strike a balance between lowering regulatory barriers for companies and protecting investors from fraud, telling McHenry that sophisticated investors are no less deserving of the protections of the securities laws.

She and SEC Corporation Finance Division Director Meredith Cross assured lawmakers the SEC is exploring whether to exempt certain investors from the 500-shareholder rule as part of the SEC's broader review into private securities trading. They also said they are exploring if the 500 number is the right one.

In addition, Cross said the SEC is thinking about soliciting input from the public about potential changes to general solicitation rules.

Republicans and some industry experts who testified on Tuesday expressed concerns about the general solicitation ban, which they said is overly restrictive and prevents unaccredited investors from viewing an offering of unregistered securities.

The advertising ban is designed to protect unsophisticated investors from swindlers and some say it may violate free speech protections in the U.S. Constitution. Schapiro told the committee the SEC is exploring that legal angle as well.

As part of its review of private securities trading, the SEC is also looking at the electronic platforms that allow investors to trade shares of unlisted companies.

Barry Silbert, chief executive of SecondMarket, sought to contrast the advertising restrictions for private offerings with the kinds of ads that are allowed in other sectors.

No one prohibits car manufacturers from advertising, even though children under the legal driving age are viewing the advertisements, said Silbert, adding that the ban unnecessarily limits the pool of potential investors and restricts capital raising.

House Oversight Chairman Darrell Issa told Reuters after the hearing he feels optimistic that the SEC will take action. I fully expect there will be some changes, he said.

Some Democrats on the panel expressed caution about tinkering with rules designed to protect investors.

I fully support helping U.S. firms access additional capital, but I also believe this must be done without sacrificing critical protections, said the Elijah Cummings, the committee's top Democrat.